Intelligent Investments: Broad Rally

Monday, December 4, 2006

Broad Rally

Today the markets moved decidedly higher with 74% of all NYSE issues increasing and 65% of all NASDAQ's doing the same. This occurred mainly because of the BONY buyout of Mellon Financial Corp and a drop in oil prices.

The portfolio performed well but dragged a little due to the drop in the price of a barrel of oil. The portfolio is correlated to the price with the Fidelity Energy Fund and the Fidelity Leveraged Company mutual funds both highly correlated to oils moves. It finished the day up 0.77% (+1,877.31). vs. .89 and .91% for the S&P500 and Russell 1000 indexes, respectively.

A new position was started today in Aetrium Inc. which manufactures and designs electromagnetically equipment worldwide. The company is profitable and small at a market cap of $32.56M and an EPS of $0.30, giving it a trailing P/E of 10. It warned not long ago of a slowdown in chip orders from its two largest customers but after shares plunged 34%, I believe there is a larger slowdown already built in- thus the potential for an upside surprise.

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Buffett's Value Formula (?)

Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:

This calculator doesn't use fancier math than the original one did. Its advantage is that it forces you to be explicit about your earnings expectations. It also automatically provides you with a hard-headed investment strategy: always invest in government bonds, unless you can find something else you are confident will yield more cash.

One other hint that Buffett has dropped over the years is that he can estimate value in his head in about five seconds; so whatever he does he keeps it simple, slugger.